Small Business

Time to Buy – Your Way into a Job

If you’re looking for an employer or want to expand your business, now’s a good time to make a move.

Thanks to the recession, there’s never been a better time to buy a small business—provided you’ve got the financial wherewithal. There has been a surge in the number of small businesses going up for sale in the past few months, but only half as many have found buyers compared to the same period last year, according to BizBuySell.com, an online small-business marketplace. That means it’s a buyers’ market, conventional valuations are out the window and there are bargain-basement prices for investors willing to take a risk in a down market.

Among the small businesses that have sold this year, the median sales price has dropped by about 20 percent to $160,000 from $200,000 last year, the site reports.

Typically, brokers and market watchers gauge the value of these deals by dividing the asking price for a business by its annual revenue or cash flow. In the past few months, these figures, known as revenue or cash flow multiples, have dropped dramatically in closing prices, by between 2.5 and 8 percent. Until recently, both multiples were rising steadily.

But it’s not that buyers are playing hardball. As unemployment grows, so does the number of potential small-business buyers on the market. Yet, few have the capital or credit worthiness they might have had in better times. And the nation’s banks are scrutinizing borrowers like never before, holding even their best clients up to much higher standards for loans and lines of credit.

“Banks just aren’t willing to back business purchase transactions to the same level that they have in the past,” says Michael Handelsman, BizBuySell.com’s general manager.

Buyers with financial backing are being extra cautious too, avoiding businesses that might have had potential in better times, but are now struggling to survive the crisis. Tougher bankruptcy laws, which are putting more businesses on the market at discount prices, are also making buyers more reluctant to take on the risk of business ownership without an escape route.

Many current owners are also highly motivated sellers—some of them keen to ditch the risky small business grind for a little while. Recent surveys show a majority of reluctant entrepreneurs—those who launched ventures after being laid off by a previous employer—would gladly trade it all for a decent paying job.

To attract buyers, many sellers are willing to go that extra mile. Here are a few conditions that have helped close deals despite the recession, according to Handelsman:

• Physical Assets for Debt Financing. Current economic conditions have made banks wary of lending. Small businesses with higher levels of tangible assets, such as capital equipment or owned real estate, will fare better in securing a purchase loan.
• Seller Financing. Buyers are facing limited access to SBA-backed loans, as well as depleted savings and retirement accounts that have been hit hard by stock market declines. Because of this lack of access to money, sellers offering to partially finance their business sale are more likely to close deals.
• Strategic Value. Sellers in this market need to make sure they have a focused plan for growth to attract potential buyers. Buyers are more willing to buy when they feel they can increase the value of the business. A plan for acquiring competitors or expanding a current business into a complementary product or service adds more strategic value.

Tags: Small Business